Signs of life
This is from the August/September 2012 issue of Commonwealth. I had been watching and collecting statistics and the overall market for several months, and I originally wrote this as a blog post. But it got so popular — and passed around so much — that our CEO decided to make it the magazine’s cover story.
Investors are investing. Housing as an investment — in the sense of creating rentals, not flipping — is catching on. Investors are pouring money into the market, both by buying single-family homes and by building multi-family ones. A Wall Street Journal headline sums it up nicely: “Investors See Gold Rush in Foreclosure-to-Rental Properties.” After all, eventually all those 20-somethings who moved back with mom and dad will have to leave the nest… again.
Forward-looking indicators are up. Whether you’re viewing stats from homebuilders (whose confidence level is rising, by the way), or the Census Bureau, or Virginia Tech (which does its own monthly study), the trend is the same: Permits and construction are both rising. So, too, are mortgage applications; in June they hit their highest level since 2009.
Housing starts have risen more than 36% from the market bottom, and homebuilders report a big boost in order growth. Oh, and construction employment is up, too — more than 100,000 jobs from the bottom.
Does it all mean anything?
Yes, yes it does. Sales are going up. That simple. Some places are seeing faster gains than others, and the overall shift isn’t as fast as we’d like, but the numbers are there. (Remember, things drop quickly but they tend to rise slowly.)
In Virginia, since 2010 almost every month’s sales have been above those of the year before. The latest figures (from May 2012) show statewide sales up six percent from 2011; in April the year-on-year gain was 10 percent. In Southwest Virginia, sales were up a whopping 38.2 percent from 2011 to 2012.
Of course it’s possible that your area isn’t seeing any bright spots. Recoveries are uneven. But the market as a whole is improving, and the tide will eventually raise all our boats.
Yes, but what about prices?
Prices are down, and they seem to keep dropping (at least nationally) — 2.9% over the past year. This isn’t surprising. This is what it looks like when the market gets back to normal.
Remember that the housing bubble inflated prices above realistic and rational levels. In other words, we shouldn’t expect them to get back to that level — not for some time, at least. Instead, they’ll drop till they hit historical norms, then roll along with ups and downs, generally tracking inflation. (Case and Shiller have shown that home prices haven’t really changed much — in terms of affordability — in more than a century.)
A recovered market won’t have prices rising every month. They’ll go up and down, month to month, with a bit more on the upside over the longer term.
Of note is the fact that REO prices have actually risen — 5.5 percent over the past year. Investors know good deals when they see them, as do individual home buyers. Higher demand means higher prices, and that in turn means less drag on the prices of non-REO property.
There are also more short sales happening that foreclosures. That’s better for property values, and it’s another parachute keeping declining prices from dropping too fast. And listing prices, according to Trulia, are inching up.
Still, what we saw in 2006 and 2007 wasn’t the norm, so don’t expect prices to get back there any time soon. Talk of prices hitting “bottom” is really talk about prices returning to their normal level.
These changes aren’t always huge or earthshaking or headline making. But they’re consistent and they’re across the board, from lenders to builders to buyers. And they all point to a turnaround in the market.
Is it a guarantee? Of course not — just check out the “Downsides” sidebar. But there is enough good news coming in and coming in regularly to make it fairly clear that the worst of the market is behind us.
Sidebar: Downsides (in no particular order)
Political gridlock. Once upon a time, our leaders made decisions based on what they thought was best for the country. They disagreed about what that was, but we were pretty sure they all had our common good in mind.
These days, though, it’s all about partisan bickering. If someone from The Other Side has an idea, it must be bad. Votes that should take hours take weeks. Decisions that are simple are bogged down in minutiae. This means that the people who are actually trying to do things are faced with a long-term uncertainty about what’s going to come out of Washington, and that’s no good for a market looking to stabilize.
Consumer confidence could falter. Yes, how people feel about a situation can affect what actually happens. As consumers become more confident in the market they’re more likely to go out and buy — the spectre of a property-value crash is no longer over them., which had been going up, began to decline.
The reverse is also true, and while consumer confidence has in general been going up, it’s not a steady rise. If consumers lose faith in the markets, it will take a while for it to be restored.
Europe. It’s a financial mess over there. Will Greek leave the euro? Will Spain need another bailout? Will Italy? What does it all mean, anyway? Some of these may be answered by the time you read this, others will remain up in the air. But European messes have a tendency to spill over to this side of the pond — although how it would affect things here is everyone’s guess.
Student loans are a drag on the future. Young folks are the buyers of tomorrow. In theory. Trouble is, they’re finding themselves under a load of crippling debt from student loans that will take many years to pay off — years when they could be saving for a down payment or paying a mortgage. That means that as we predict the market going forward we have to assume a generation with much less disposable income.
Expensive rentals won’t last forever. Although the high demand for rentals has made them more expensive, that won’t last forever. Investors are buying up foreclosures to turn them into rentals (they, too, can read the writing on the wall). That means supply will eventually increase to meet demand and, possibly, drive rents down and make them more attractive.
Lower supply could be a bad thing. Normally after the past few years we’d be glad to see all that excess inventory absorbed by the market, whether by individuals or investors. But low supply is also caused by people being unable or unwilling to sell their homes; if someone is deep enough underwater, he won’t bother listing his home even if he wants to move.
CoreLogic’s economists looked at this very issue and found that yes, there was a solid correlation between how much negative equity there is in an area and how many homes are for sale. More underwater owners mean less inventory. Simple as that.
It gets worse. As more people get out of negative equity situations (though short sales or simply accepting less), it means they’ll have less money for a down payment on their next home. And lenders aren’t terribly interested in no-down-payment loans, meaning owners will become renters.
So when we see that “months of supply” number go down, we’re seeing a symptom — and we don’t know how much of it is caused by something good (more sales) and how much is because of something bad (underwater owners).
Unemployment figures lie. The way the federal government has measured unemployment for the past decade or so is misleading. It doesn’t count people who want a full-time job but have run out of unemployment benefits, or those who are working part-time because that’s all they could get. Real unemployment is actually two or three points higher than the number you hear on the news. And when you read about unemployment going down, that just means people are coming off the unemployment rolls — not necessarily that they’ve found full-time work.
Sidebar: Who’s on the bandwagon?
Harvard’s Joint Center for Housing Studies: While too soon to tell with confidence, the worst may be over. [snip] The FHFA Home Price Index…also showed a year-over-year increase in the first quarter 2012, providing further evidence that home prices are finally stabilizing.
Tom Lawler, independent housing economist: “As always, of course, real estate is local. Nationally, however, I believe the housing market has bottomed, both in terms of production (starts), sales, and, with a lag, prices. Don’t expect rapid rebound…”
Zillow: “With stronger home sales, we’ll see a reduction in the amount of vacant housing inventory and an improved ability to absorb foreclosed homes. This increased demand will eventually start to put a floor under home values.”
Brad Hunter, chief economist for housing-information service Metrostudy: “I think we reached the bottom at least a year and a half ago for housing starts and housing demands. For prices, in some markets we have reached bottom – but not all.”
Glenn Kelman, CEO of Redfin: “We hit the bottom last year. I don’t think that means it’s going to be a V‑shaped recovery. There will be ups and downs and sales volume isn’t going to recover in any meaningful way.”
Bill McBride, economist at CalculatedRisk: “Clearly new home sales have bottomed. Although sales are still historically very weak, sales are up 25% from the low, and up about 15% from the May 2010 through September 2011 average.”
Rick Sharga, executive vice president, Carrington Mortgage Holdings: “I think we’re either at or very, very near the bottom, and that prices will stabilize on a national basis this year.”
Budge Huskey, president and COO of Coldwell Banker Real Estate: Besides the obvious improvement in the labor market, “there are some fundamental things that are shifting in the real estate space that bode well for the balance of the year,” says Budge Huskey. “We’ve had several straight months of positive housing data [that’s] really been in line with the more positive economic data. They are going in lockstep.”